Unit 4 Economics Definitions

The growing integration and interdependence of the world economy, i.e. the increased international movement of output, financial capital, FDI (multinational production) and the harmonisation of consumer tastes.

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Comparative Advantage

The producer with the lowest opportunity cost of production (or highest output per factor of production) for a particular product.

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Absolute Advantage

The producer with the ability to make the largest amount of a particular product using its factors of production.

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Multinational Companies

Large company with production based in several different countries.

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Foreign Direct Investment

Spending by firms on productive capacity in other countries.

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Protectionism

The raising of trade barriers against imports.

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Infant Industry Argument

Rationale for protecting domestic firms from foreign competition until they have grown large enough to achieve the economies of scale to match rival foreign firms.

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Common External Tariff

A tax on products imported into a customs union. A method of protection used by a customs union to keep down imports from non-members; the tariff is designed to raise the import price to the same level in each member country.

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(Import) Quota

A limit on the number of imported goods allowed into a country over a period of time. A barrier to trade which leads to deadweight losses and higher consumer prices; their effect is more certain than tariffs which depend on elesticities.

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Non Tariff Barriers

Methods to prevent the sale of imports apart from tariffs or quotas: e.g. product quality controls designed to favour domestic firms, preferential buying from domestic firms by public sector.

Organisation to promote free trade and coordinate (police) reduction in barriers to trade.

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Free Trade Area (FTA)

A group of countries which coordinate a reduction of trade barriers between themselves but do not erect a common external tariff - often progresses to customs union because each country has different tariff against non-members.

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Customs Union

A group of countries with reduced trade barriers (tariffs & quotas) between members but a common external tariff against imports from outside.

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Common Market

The stage of economic integration between states when barriers to capital (e.g. exchange controls) and labour mobility (e.g. visas) are removed.

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Economic and Monetary Union (EMU)

When a group of countries in a common market abolish national currencies to share a single currency and therefore operate a single monetary policy for the whole union.

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Convergence Criteria

Macroeconomic conditions that must be met before a country is allowed to join an Economic & Monetary Union, i.e. low inflation, low government budget deficit, low national debt exchange rate stability against other EMU currencies

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Stability and Growth Pact

Limit placed on government budget deficit for countries belonging to the European Single Currency

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Trading Bloc

A group of countries who form a free trade area, customs union or common market as a way to reduce trade barriers between them and raise barriers to non-members.

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Trade Creation

The welfare gains from joining a customs union. These derive from having reduced trade barriers with customs union members, e.g. lower tariffs will enable countries to specialise more in what they have a C/A gaining the deadweight loss of tariffs.

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Trade Diversion

The welfare losses to a country from joining a customs union. These derive from having to adopt a common external tariff which may raise the price of imports from low cost producers outside the customs union.

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EU Enlargement

Process whereby its established 15 members of the European Union is widening its membership to new European (accession) countries

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Competitiveness

The ability of domestic firms to sell their output in the global market (domestic & foreign)

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Unit Labour Costs

Labour costs per unit of output. Key indicator of a country's competitiveness: if output growth can outpace growth in the total wage bill then unit labour costs fall making the goods more competitive.

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New Deal

New Labour's policy to combat long term unemployment: after a period of assisted job search, an unemployed person is guaranteed some form of paid work (voluntary work or subsidised employment) or training.

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Social Chapter

Section of the Maastricht Treaty which commits European Union countries to guarantee certain legal rights of workers in the labour market.

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Working Time Directive

Regulation setting a maximum number of hours per week an employer can insist his employees work.

Exchange rate is maintained at a target level by government interventions in the currency market.

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Devaluation

Fall in the value of exchange rate, usually announced by government when part of a fixed exchange rate system.

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Marshall Lerner Condition

The sum of elasticity of demand for exports and imports must exceed one. This guarantees that a devaluation of currency will imporve the trade balance of payments of the current account.

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J curve effect

The short term fall in Balance of Payments current account following a devaluation of the exchange rate before long run elastic demand for imports and exports lead to rise.

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Hot Money

Money in search of the highest short term rate of return available internationally

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Dutch Disease

Where the strength of one sector of an economy drives up the exchange rate to a point where its other sectors lose competitiveness

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Real Exchange Rate

The price of a country's goods relative to those produced abroad when expressed in a common currency.

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Effective Exchange Rate

The exchange rate of a country's currency measured against a weighted average of the currencies of its major trading partners.

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Balance of Payments Disequilibrium

Where Balance of Payments current account has a large persistent and rising deficit (or surplus) over time.

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Development

Broad notion of progress in social and economic conditions within a society covering improved material standards of living, self esteem and expanded opportunities for all individuals.

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Less Economically Developed Countries (LEDCs)

Term referring to those countries with relatively low per capita income.

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Newly Industrialised Countries (NICs)

Countries which have industrialised since 1950

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Infrastructure

The capital making up society's transport and communications networks, its supply of basic amenities and key public services.

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Subsistence

Where farming families produce food for their own consumption.

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Cash Crop

Agricultural crop which is produced for the export market

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Brain Drain

The emigration of highly skilled workers (domestically trained) who are able to earn far higher salaries abroad

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Debt Crisis

Constraint on economic growth facing LEDCs due to growing proportion of their national income needed to service the debt to richer economies.

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Capital Flight

The withdrawal of funds from a country due to poor economic conditions, hastened by a speculative fear of currency devaluation.

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Rural - Urban Migration

Relocation of people from villages to cities

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Corruption

Where government officials allow law-breaking in exchange for illegal payments.

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Demographic Transition

Model where population grows according to four phases as a country develops economically. 1.High birth&death rates, 2. Death rates fall, 3.Birth rates fall, 4.Low birth & death rates (steady population)

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Industrialisation

Early stage of economic development where proportion of national output from manufacturing grows rapidly as agriculture's share declines.

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Deindustrialisation

Later stage of economic development where proportion of national output from manufacturing declines steadily as the share from the service sector rises.

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Harrod - Domar Growth Model

Model asserting national economic growth depends on increases in its savings rate and decreases in its capital - output ratio.

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Prebisch - Singer Hypothesis

Hypothesis that countries which specialise in primary products will suffer falling terms of trade over time.

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Terms of Trade

Ratio of an index of a country's export prices to an index of its import prices.

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Trickle Effect

Belief that when the rich get richer, the poor will experience some improvement in their incomes as an indirect result.

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Import Substitution

Strategy used by LEDC governments to replace imports of manufactured goods with domestic production.

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International Monetary Fund

Institution designed to stabilise the world's financial system, stepping in when exchange rates move dramatically and where countries experience severe Balance of Payments problems.

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Stabilisation Programme

Conditions attached to loans from the IMF designed to strengthen macroeconomic performance.

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World Bank

International financial institution which provides funds for development projects.

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Structural Adjustment Programme

Conditions attached to loans from the World Bank designed to strengthen microeconomic performance by encouraging market friendly institutions.

The effect of inflation (or even real earnings growth) which increases the tax burden in a progressive income tax system without government raising tax rates because people move into higher tax brackets.

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Fiscal Boost

The effect of inflation to reduce the real burden of unit taxes over time unless government indexes unit taxes or moves them in line with inflation.

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Income Effect (and Supply of Labour)

The increased demand for leisure (fall in supply of labour) by an individual worker as wage rates rise because workers regard leisure as a normal good to be enjoyerd more as they earn more.

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Substitution Effect (and Supply of Labour)

The fall in demand for leisure (increased supply of labour) by an individual worker as wage rates rise because leisure becomes more expensive in terms of opportunity cost (wage foregone)

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Laffer Curve

The relationship between average rate of income tax and tax revenue: at low tax rates, raising tax rates will increase revenue but at a point revenue falls as workers lose the incentive to work.

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National Debt

Outstanding debt of a national government at a point in time.

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Golden Rule

UK Government must only borrow for investment projects: all current spending (non durable items, like wages) must be paid for from current year tax receipts.

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Sustainable Investment Rule

UK Government must ensure national (i.e. public sector) debt never exceeds 40% of national income.

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Phillips Curve

Inverse relationship between rate of wage inflation and unemployment in the macro economy.

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Monetarism

The belief that monetary policy is the only way for government to effectively run the macro economy.

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Keynesianism

The belief that the macro economy can reach an equilibrium even with much unemployment and that then expansionary fiscal policy is a more effective solution than monetary policy.

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Comments

This is a set of 93 flash cards covering the unit 4 syllabus. Definitions are accurate and most of the main terms are included. Can be used for personal and joint revision and highlighting areas for further study.